Minnesota’s Economy: Mediocre Performance Threatens State’s Future

That is the title of the report by Dr. Joseph Kennedy that the Center released this morning. The report promises to spark a vitally important debate on the future of Minnesota’s economy. Is Minnesota really the state that proves “blue” policies can produce a strong economy? Or have the state’s liberal public policies produced sub-par economic performance, despite Minnesota’s many advantages?

This is the Executive Summary that accompanies Dr. Kennedy’s report:

Many Minnesotans believe that their state’s economy performs well above the norm, and therefore vindicates the “blue state” policies that, for the most part, have prevailed in Minnesota for a number of years. Unfortunately, a systematic review of the facts does not bear this assumption out. On the contrary, the data show that Minnesota’s economy has been average, at best, over the past 15 years.

Worse, leading indicators are nearly all pointing downward. If nothing changes, Minnesotans can expect their economy to perform below average in the years to come. Indeed, this is exactly what the state’s own agencies currently project.

Specifically, a thorough analysis of a broad range of economic data shows that:

• Minnesota’s economic growth is now just average while productivity continues to be below average. Minnesota’s growth in gross domestic product (GDP), the most basic measure of economic success, historically grew a touch faster than the U.S. However, from 2000 to the present, Minnesota’s GDP growth settled to just average with the U.S. Looking at GDP per worker, the average Minnesota worker in private industry, in both goods producing and service producing sectors, is less productive than the average American worker.

• Most states have done better than Minnesota in both income growth and job growth from 2000 to the present. Minnesota ranks 30th in per capita income growth, 34th in growth in disposable income, and 28th in rate of job creation.

• The Twin Cities rank average or below average among major urban areas in economic growth and job creation. The Twin Cities area ranks ninth out of the largest 15 metropolitan areas in growth in economic output since 2001, and eighth out of 15 in job creation.

• Areas where Minnesota looks strong are driven primarily by Minnesotans’ work ethic rather than by a dynamic economy. Minnesotans have higher than average per capita incomes. This is largely because, compared with other states, more Minnesotans are in the labor force. Similarly, Minnesota has higher than average household incomes, mostly because the state has more two-earner households.

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While in the recent past Minnesota’s economic performance has been mediocre, numerous danger signals indicate an even weaker future unless policy changes are made.

• In recent years, Minnesota’s job growth has centered on less productive jobs. It is clear that the jobs being created are not necessarily the most valuable. In some occupations with a high impact on GDP, such as mining, information and utilities, the number of jobs has stagnated or even fallen. In contrast, the fastest growing occupations, health care and educational services, have a relatively low impact on GDP. For as long as this continues to be the case, net job growth may not imply rising average incomes.

• Minnesota’s high-technology employment is declining. In 2015, there were fewer Minnesotans working in high-tech jobs than there had been in 2000, both in absolute numbers and as a percentage of the work force.

• Minnesota is suffering a dangerous decline in entrepreneurial activity. Venture capital is declining. New firm formation is falling. In addition, the rate of new entrepreneurs is below the national average and dropping.

• Productive Minnesotans are leaving the state, while residents of other states are not choosing to move to Minnesota. Every year, Minnesota suffers a net out-migration of thousands of households to other states. In 2014, the net household income lost in this out-migration was $948 million, a figure that has been rising steadily. Minnesota now ranks 47th among the states as a net destination for households with incomes over $200,000. The overwhelming majority of this loss of Minnesota residents is to lower-tax states.

• Minnesota’s own agencies predict the state’s future performance to be below average. Minnesota Management and Budget projects growth in personal income and jobs to be lower than the national average in each of the next four years. The Minnesota Department of Employment and Economic Development projects that in the ten years from 2014 to 2024, Minnesota will underperform the nation with respect to job creation in 19 of the 22 major job categories.

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For most of its history, Minnesota has enjoyed a strong and diverse economy. That history built up a high standard of living. Minnesota has long held key advantages that should contribute to a more productive and prosperous economy. Minnesota is among the nation’s leaders in educational attainment, family cohesion, workforce participation, health, cultural amenities and low crime. Minnesota also possesses abundant agricultural, mining, and timber resources.

Despite all of these advantages and the state’s prosperous past, the analysis of Minnesota’s economy reviewed here shows that Minnesota’s recent economic performance is mediocre. Worse, data show a declining level of business creation, entrepreneurship, investment and job growth in key industries, all of which weaken future growth prospects. It seems clear that if the state continues on its present course, its economic performance will soon lag well behind that of most other states. Indeed, lagging growth is exactly what official economic projections predict will happen.

Are Minnesota’s blue-state policies responsible for its economic underperformance? There is no question Minnesota’s higher tax and regulatory burdens add to the cost of doing business. In recent years, Minnesota has increased these burdens while a number of other states, such as North Carolina, Indiana and Tennessee, have taken serious steps to reduce them. Without any other obvious weak points—beyond the inescapable realities of the state’s northern locale—Minnesota’s tax and regulatory burdens are among the only suspects at the scene of Minnesota’s mediocre economic performance.

This table summarizes the data presented in this report, and classifies Minnesota’s performance as above average, average, or below average:

Upcoming Events

Please join Center of the American Experiment on Wednesday, January 16th at the Hilton Hotel for a lunch forum with Center economist and author of the new report, “The State of Minnesota’s Economy: 2018,” John Phelan. Learn where Minnesota’s economy stands and where it is headed. John Phelan is a graduate of Birkbeck College, University of London, where he earned a BSc in Economics, and of the London School of Economics where he earned an MSc. John worked in finance for ten years before becoming a professional economist. At Capitol Economics in London, he wrote reports ranging from the impact of Brexit…